Smart Investor: how I filter out dud investments

@Smart Investor - at last, someone else who suspects that sometimes the financial data provided for free on the internet is not always correct!

@All - The thing I would most like would be charts of the key ratios, particularly P/E, over various time spans, preferably 1, 3, 5, & 10 years. Some companies experience (and deserve) fairly high ratios most of the time because of their performance - these are usually worth buying if you can get in at the right time. Having a chart of the key ratios would help to time entry and exit. Does anyone produce such charts?

Unless you also use ratios based on at least two years forecasts, this system can go horribly wrong, especially for cyclicals.

I have been trying to adopt a screening system based on ratios, but am constantly undermined by the lack of clarity in the historic company accounts. GEC nailed me in the 1990's and the banks in the 2000's, in addition to the inconsistency in the calculation of ratios. Is it the Accounting profession or the Directors?

@Long Term Investor - I'm with you there. How many people could have spotted the catastrophe at Marconi just by reading the accounts or plotting ratios? However I don't think the difficulties invalidate the method, they just emphasise the need to (1) not keep all your eggs in one basket, and (2) have trailing stops on everything, even your star picks

Zaydac, ShareScope has charts of profit, eps, dividends, yield, turnover, PEG, P/E, and more for each stock.

As for data accuracy, it's probably always best to read the annual reports once you've honed in on something anyway and get the data straight from the horse's mouth.

@zaydac what broker do you use who has a good trailing stop system?

@Steve Hayes - I haven't got automated stops at the moment, my active portfolio has only a small number of shares and take I decisions manually. I'm not convinced that automated stops really work because if a price gaps down you might be selling at the worst moment and would do better to hang on a bit. Even when BP was falling like a stone there were lots of rebounds on the way down. But when I am going away somewhere that puts me out of touch I do sometimes sell things because I can't leave an automated stop in place. What I meant in my post was that I don't believe in holding on to anything for ever. If an investment has had a good run and then starts to look as though it has peaked I believe in selling and moving on to the next idea. When I buy anything I always set a stop loss in case I am early or just plain wrong, and If I am right and the investment increases in price I ratchet the stop upwards.

Ratios, figures, numbers, digits. Theoretical values, all calculated, estimated, and assumed to be accurate.

Unfortunately I am as cynical as Victor Meldrew when it comes to accounts for the following reasons.

When I was working I gained first hand knowledge of just how unreliable accounts can be:

e.g. A supervisor instructed a team of temporary staff to help with the monthly stockcheck. After about an hour he walked round to see how they were getting on. He became suspicious when he looked in a box full of hundreds of items, which had been entered on the stocklist as only containing seventeen.

When asked to explain why he had recorded only seventeen items when any reasonable person could see at a glance that there were in fact many more, the operator replied. "You asked me to count the number of items in the boxes". "You didn't ask me if I could count" !!

Also: I have been reading about a statistical study which was conducted recently concerning the rounding up of numbers as entered in accounts.

The study found that a significant number of accounts contained a paucity of the digit four, in the context of: .4, .04, .004 etc.

The findings concluded that the reason for the shortage was that all point fours had been entered as point five, which could in turn be rounded up to the next whole number.

When dealing with millions or even billions of pounds this seemingly unimportant surd can make an enormous difference to how a companies financial performance is percieved, especially when considering values expressed in pence per share.

I accept that many Plcs do their best to produce accurate reports, but, as the collapse of the banking sector has clearly demonstrated, corporate governance is still sadly lacking in some of them.

As a footnote; some of my best investments have come from conducting my own, grass roots research, before I even looked at a balance sheet.

I'm not disagreeing about the value of ratios from an historic standpoint, but if you want to identify a company that is 'turning a corner' etc then one should look for evidence on the ground. When it is difficult to find a space in the company's car park, asking the manager of the local Majestic Wine warehouse how the change from 12 bottles minimum to six has affected sales, looking through the recruitment pages, asking your kids why they all shop online at ASOS you get a feel for the companies who are changing for the better. What is more the reasons for change make sense to you so you have more confidence in your own hunches, far better than advice from those behind desks with their calculators! Keeping ahead of the game is far more profitable than just keeping up with it.